Who Invests in Corporate Tax Avoiders?

43 Pages Posted: 16 Feb 2017 Last revised: 21 Jun 2017

See all articles by Sonja O. Rego

Sonja O. Rego

Indiana University - Kelley School of Business - Department of Accounting

Brian Williams

Indiana University - Kelley School of Business - Department of Accounting

Ryan J. Wilson

University of Oregon

Date Written: June 20, 2017

Abstract

We use detailed data on individual investors’ stock holdings to investigate whether corporate tax avoidance affects the willingness of individual investors to own stock. Consistent with corporate tax avoidance increasing both the perceived risk of owning stock and the costs of processing financial information, we provide robust evidence that individual investors own less stock of firms with low effective tax rates, our proxy for corporate tax avoidance. We then examine whether investor sophistication and investment strategies impact individuals’ willingness to own stock in firms with low effective tax rates. Our results suggest that more sophisticated investors and investors with shorter investment horizons own more stock in high tax avoidance firms, while more conservative investors own less. We also demonstrate that individual investors that own more stock in firms with low effective tax rates earn significantly higher abnormal stock returns than individual investors that own less such stock. Our results are robust to numerous control variables, the use of a changes specification, and to alternative measures of corporate tax avoidance. Overall, our findings suggest that less sophisticated and more conservative investors are less willing to own stock in corporate tax avoiders and thus, are at a disadvantage relative to other individual investors.

Keywords: tax avoidance, individual investors, stock holdings, investor sophistication, investment strategies

JEL Classification: D14, D22, D8, G11, G12, H26, M4

Suggested Citation

Rego, Sonja O. and Williams, Brian and Wilson, Ryan J., Who Invests in Corporate Tax Avoiders? (June 20, 2017). Kelley School of Business Research Paper No. 17-16. Available at SSRN: https://ssrn.com/abstract=2919004 or http://dx.doi.org/10.2139/ssrn.2919004

Sonja O. Rego (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812 855-6356 (Phone)

HOME PAGE: http://kelley.iu.edu/Accounting/faculty/page12887.cfm?ID=33017

Brian Williams

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Ryan J. Wilson

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

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